Teck Turns To China To Lower Debt

It was such a short time ago that Canada’s biggest independent miner was suffering from too much debt and too little cash flow.

Teck’s (TCK. B, TCK-N) acquisition of Fording Canadian Coal Trust at the top of the commodity cycle last year left it severely weakened when commodity prices took a nosedive shortly after the deal, and its share price told the story. The once mighty miner with shares trading in the $50-range saw its Class B shares fall to a close of just $3.42 as recently as March 5.

But on July 3, its share price told another story. Teck shares finished $1.51 or 8% higher at $20.01 after a massive Chinese investment in the company was announced.

State-owned China Investment Corp. (CIC) — one of the world’s biggest sovereign wealth funds with US$200 billion in assets — is buying 101 million of the company’s Class B shares at a price of $17.21 per share. That gets CIC a 17.5% stake in the company and gives Teck $1.7 billion in cash.

For Teck, such a large infusion of funds will immediately cast its balance sheet in a better light.

Teck’s chief executive, Don Lindsay, said on a conference call that the company would be finished paying off its $5.8-billion bridge loan in a matter of weeks even without the CIC deal, but that its term loan will be significantly lower as a result.

The company’s term loan stands at US$3.9 billion. With the CIC private placement, that will be cut to US$2.4 billion.

“Sale proceeds from remaining gold transactions and proceeds from the sale of one-third of the Waneta Dam reduce it to US$1.5 billion,” Lindsay says of the recently announced asset sales. The Waneta deal with BC Hydro, announced in June, is worth $825 million.

At the US$1.5-billion level, the company plans to let cash flows from operations take over.

“It wouldn’t take very long for free cash flows to fully eliminate the term loan,” Lindsay said, adding that the company would require no further asset sales. “We should have less than a billion to go at year end.”

Also of note is the fact that the deal with CIC allows Teck’s foremost family, the Keevils, to maintain much of their control over the company. The equity issue to CIC only amounts to a 6.7% voting interest in the company due to the dual-class nature of the company’s stocks.

A third aspect to the deal is that it could well usher in a new prominence for the company in China — a country that is emerging as a crucial commodity consumer.

“China is a key market,” Lindsay said. “Having good relationships with China going forward will make a big difference.”

Lindsay knows of what he speaks. With China’s steel industry running at record levels, Teck is seeing its high-quality coking coal come into much greater demand.

“In the past, China has essentially been self sufficient,” Lindsay explained. “They imported 3.2 million tonnes of coal last year; this year, however, they are importing at an annual rate of 20 million tonnes and that is in a total global market of 120 million tonnes.”

Lindsay believes the trend will only strengthen as more coastal blast furnaces come online in the coming year, spurring demand for imported coal to 55 million tonnes for 2010.

Adding to the growing need for imports is the decline of production from China’s most important national source of metallurgical coal. Production of coking coal is only 65% of what it was the previous year, as small miners have been shut down for safety reasons and larger miners need to go deeper for tonnage.

It all amounts to a shift to more imports of high-quality coking coal and “Australia and Canada are the two best sources,” Lindsay said.

The acquisition of the Elk Valley coal assets from Fording put Teck in a good position to be a key supplier. The Elk Valley projects are considered the second-largest metallurgical coal assets outside of China.

As for future moves by Teck in the coal sector, Lindsay reiterated that the company would be open to cutting a deal with either a large customer or a producer in Australia.

In the first scenario, a key customer would take 20% of the business, and take a large amount of tonnage through offtake agreements.

It was the second option, however, that Lindsay was more animated about.

He said any prospective partner would have to be a “large international mining company with assets in Australia. That way we could utilize Canadian and Australian coal projects. We could deliver from either source to accommodate different markets. We wouldn’t have to depend on a single railway and shipping costs would vary. . . We’re looking at this closely.”

Teck recently announced a five-year agreement with Canadian Pacific Railway that it says will reduce its coal shipping costs. The deal, a result of federal arbitration, replaces another that expired at the end of March. Teck says the new rate structure is not linked to the coal price. It also secured the choice to use an alternative link to ship some of its coal for part of the route to the B. C. coast. Starting from Kamloops, it can now use Canadian National Railway to transport product to ports near Vancouver.